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Anatomy of a Contract –Anatomy of a Contract –A Workshop on Contracting for A Workshop on Contracting for

Independent ContractorsIndependent Contractors

Presentation for the Corzo Center for the Creative Economy at the

University of the Arts

December 6, 2011

Francis X. Taney, Jr.


Anatomy of a ContractAnatomy of a Contract

• Some key features of contracts• Scope of work• Warranties and performance standards• Intellectual property ownership• Payment provisions• Restrictive covenants• Limitations on damages• Dispute resolution provisions


Anatomy of a Contract

• Understanding the purpose of key contractual provisions

• Drafting techniques

• Identifying potential problem areas

• Balancing and allocating commercial and legal risks


Scope of Work

• Example: “In exchange for payment of the fees referenced in the Fee Schedule, Contractor will perform the services described in the Scope of Work attached as Exhibit ‘A.’”

• Goal - Clearly describe the nature of the work required to be paid


Scope of Work

• Know your audience - the fact finder

• Produce clarity, and eliminate ambiguity

• Describe items of work objectively in plain English

• Depict subject matter graphically where possible

• Define jargon and technical terminology

• Define areas of responsibility

• Address key assumptions


Scope of Work

• Depict subject matter graphically where possible: “The website landing page and subpages shall have a look and feel substantially in accordance with the conceptual sketches attached to this Exhibit A.”

• Define jargon and industry terminology


Scope of Work

• Define areas of responsibility: “Upon contract execution, Customer shall provide the following items of information with respect to its customers: [_____]. Contractor shall import this information into the CRM application.”

• Address key assumptions: • “Customer shall make its Chief Financial Officer available to

Contractor to discuss end user requirements on or before 12/31/11.”

• “Customer shall allow Contractor access to Customer’s production environment during the hours of 9 am to 4 pm, Monday through Friday, during the term of this Agreement.”


Scope of Work

• Use an integration clause: “This Agreement together with the terms of the Proposal constitutes the entire agreement between the parties with respect to the Programs and shall supersede all previous proposals, both oral and written, negotiations, representations, commitments, agreements, and all other communication between the parties concerning the Proposal.”


Scope of Work

• Don’t merely incorporate a proposal containing sales and marketing speak:

• “Our application is lightweight and scalable”

• “Our application is simple to configure”

• Avoid imprecise language in addressing allocation of responsibility and key assumptions:

• “Customer will cooperate with Contractor . . .”

• “Customer will facilitate the transfer of information . . .”

• “Contractor will partner with Contractor . . .”


Warranties and Performance Standards

• “Contractor will perform the Services in a good, workmanlike and professional manner in accordance with the Specifications attached as Exhibit B.”

• Goal - Clearly define how well you have to perform to be paid



• Use underlying business need as starting point for standard, and seek objective criteria/functionality:

• “The application shall allow 10 concurrent users.”

• “The application shall complete 10 transactions per minute”

• “The application shall experience no more than 1 hour per month of unplanned downtime.”



• Confine and limit express and implied warranties:

“THE WARRANTY HEREIN IS EXCLUSIVE AND IN LIEU OF ALL OTHER WARRANTIES, WHETHER STATUTORY, ORAL OR WRITTEN, EXPRESS OR IMPLIED. CONTRACTOR HEREBY DISCLAIMS ALL IMPLIED WARRANTIES, INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.”



• Integration clause

• Limit your downside for failing to meet the standard

• Notice and opportunity to cure

• Repair and replace


Managing Changes in Scope

• Changes in scope result from changes in the time, cost, amount or difficulty of performance

• Expressed in terms of changes in compensation, and changes to the project delivery schedule

• Goal: Put mechanisms in place to minimize the disruption caused by changes in scope



• Include change order clause: “In the event that Customer requests or directs Contractor to perform work in addition to the Scope of Work, this work shall be the subject of a Change Order. The parties will

• Seek right to cease work until disputes over scope are resolved: “Contractor may cease work in the event that the parties cannot agree that a Change Order is appropriate, or upon the cost or schedule adjustment associated with a Change Order.”

• Negotiate change order items up front where possible: “In the event of Change Order requiring Contractor to expend additional time, the change order rate shall be $50 per hour.”



• Provide for periodic documentation of progress: “Contractor and Customer shall conduct a weekly conference call to discuss the progress of the project. Contractor shall create written minutes of the items discussed during the weekly conference call and provide a copy of the minutes to Customer for review and supplementation and/or correction, if applicable, at the subsequent weekly conference.”

• Do not hold back on change order claims

• Document problems as they arise


Protecting Intellectual Property

• The main varieties of intellectual property are patents, copyrights, trademarks and trade secrets, and each come into being and are protected differently

• Goal: Ensure that the scope of the rights you retain and transfer are consistent with value you receive and the needs of your business



• Appreciate the difference between licensing and conveyance of ownership

• Obtain clarity on scope of permitted and prohibited behavior

• Match value of what you license or give away to your compensation



• Sample provision pertaining to intellectual property (part 1):• “Customer expressly acknowledges and agrees that Customer

shall not have or acquire, solely by this Agreement, any rights, claims, or other ownership interests, legal, equitable or otherwise, in any patent, copyright, trademark, service mark, design concept, software right, methodology, or other, similar intellectual property right in any goods or services used by Contractor and or provided to Customer pursuant to this Agreement. Customer shall have access to all source code and documentation used within this scope of work for the Application). The Customer will not have ownership of, nor access to, any Contractor source code for the Application (the “Contractor Source Code”), and Customer may not duplicate, translate, disassemble, decompile, reverse assemble or reverse engineer all or any portion of the Contractor Source Code.”



• Sample provision governing intellectual property (part 2):

• “Rather Contractor shall grant Customer a perpetual, non‑transferable, non‑exclusive, royalty‑free license to use the compiled code for the Application. Nothing in this Agreement shall transfer or be deemed to transfer to Customer ownership of any patent, copyright, trademark, service mark, design concept, software right, methodology, or other, similar intellectual property right, and Contractor expressly retains all right, title and interest in and to such property. Except as otherwise explicitly set forth in this Agreement, and on the express condition that Customer not be in default of any provision of this Agreement, Customer's sole rights in such property shall be limited to the grant by Contractor to Customer of a perpetual, non‑transferable, non‑exclusive, royalty‑free license to use such property.”


Minimizing Difficulties in Obtaining Payment

• Contracts should specify the timing of payments due to the contractor in exchange for the production of deliverables or the demonstration of progress

• Goal: Maintain balance between payments and the delivery of value and the expenditure of resources and avoid ambiguity as to criteria for payment



• Do not let the customer get "ahead of you"

• Negotiate objective criteria for entitlement to payment

• Credit is for customers who have earned it



• Spell out right to terminate upon failure to make timely payments or disputes over entitlement to payment

• "Possession is nine tenths of the law"

• Condition conveyance of IP rights on full payment


Non-Competes and Restrictive Covenants

• Non-compete and restrictive covenant provisions limit a person or a company from performing certain kinds of work or work for certain customers for a specified period of time

• Goal - Avoid undue restrictions on your ability to make a living and benefit from your experience



• The three key dimensions of a restrictive covenant are typically time, geography and field of endeavor

• Measure value of the current opportunity versus the value of the work that is foreclosed



• Negotiate for clarity and objectivity on

• prohibited activities

• off limits customers

• time



• Sample restrictive covenant provision:

• “Contractor agrees that for the term of the Agreement for one year thereafter, Contractor will not provide Competitive Services to any post-secondary educational institutions within Philadelphia County. For purposes of this agreement, “Competitive Services” shall mean the installation, modification, implementation, development or support of any customer relationship management software.”


Remedies/Damages

• Remedies refer to the relief a party may obtain in the event of a breach by the other party

• Remedies include monetary damages but may also include non-monetary items

• Goal: Do not undertake liability that is unreasonable in light of the technical and commercial circumstances


Remedies/Damages

• Attempt to limit or exclude consequential damages and to cap overall liability

• Consider effect of indemnification

• Offer remedies other than monetary damages


Remedies/Damages

• Sample provision limiting damages and remedies:

“SUBJECT ONLY TO THE WARRANTY PROVISIONS HEREIN, THE EXTENT OF CONTRACTOR'S LIABILITY UNDER THE WARRANTIES AND REPRESENTATIONS SET FORTH IN THIS AGREEMENT, TO THE EXCLUSION OF ALL OTHER REMEDIES IN CONTRACT, TORT, OR OTHERWISE, SHALL BE LIMITED TO THE CORRECTION OR REPLACEMENT OF ANY DEFECTIVE ITEM(S) OR ERRORS IN THE DELIVERABLE, AS APPLICABLE, AT CONTRACTOR’S OWN COST AND EXPENSE, PROVIDED WRITTEN NOTICE OF SUCH DEFECTIVE ITEM(S) IS GIVEN TO CONTRACTOR DURING THE WARRANTY PERIOD.”


Remedies/Damages

• Specify availability of injunctive relief: “Customer agrees that his obligations provided in this Agreement are necessary and reasonable in order to protect Contractor and its business. Customer acknowledges that there is no adequate or complete remedy at law, including damages, for the disclosure and/or use of Confidential Information by Customer in violation of this Agreement and that, in addition to any remedies to which Contractor may be entitled at law, Contractor shall be entitled to seek injunctive relief and other equitable remedies in the event of such violation.”


Remedies/Damages

• Consider using liquidated damages to address situations where damages are difficult to prove: “In the event that Contractor is unable to deliver the Application on or before the due date, Contractor shall pay Customer liquidated damages in the amount of $___ per day.”


Dispute Resolution

• Dispute resolutions typically address the dispute resolution mechanism, choice of forum for dispute resolution, and choice of applicable law

• Goal: Negotiate provisions that minimize the burden and disruption of dispute resolution


Dispute Resolution

• Three options for dispute resolution are litigation, arbitration and mediation

• All vary in numerous important dimensions, but mediation is typically cheapest and least disruptive to the relationship


Dispute Resolution

• Forum for dispute resolution affects cost and difficulty of litigation

• Effect of choice of law provision hard to predict in advance


Dispute Resolution

• Consider the potential affect of these provisions and attempt to obtain terms favorable for your circumstances. One potential example:

“This Agreement shall be deemed to have been made in The Commonwealth of Pennsylvania, and shall be governed by and construed in accordance with the laws of The Commonwealth of Pennsylvania, exclusive of its rules governing choice of law and conflict of laws. All disputes arising under or relating to this Agreement that cannot be resolved amicably, other than claims for injunctive relief, shall be resolved by binding arbitration before the American Arbitration Association, by a single arbitrator, in Philadelphia, Pennsylvania.”


In Conclusion

• Each project or relationship requires individualized consideration, planning and management

• Draft contracts with your ultimate audience in mind

• Put in the effort on the front end to avoid costly problems on the back end

• Being right isn’t always enough if you haven’t been clear

• Address problems sooner rather than later to keep them small

• Be prompt and straightforward in your communications with your contractual partner


Contact Information

Francis X. Taney, Jr.

Buchanan Ingersoll & Rooney PC

Two Liberty Place

50 S. 16th Street, Suite 3200

Philadelphia, PA 19102

Phone: (215) 665-3846

Facsimile: (215) 665-8760

[email protected]